1/31/2012 XLF#2

 SPDR Financial Selected Sector Fund (XLF)

The daily chart is the same one from last post. If you read the last XLF post, I mentioned that the break was likely to test the 6 months top @ $14.17 and consolidated for a short period of time. Here you can see the XLF poked through the resistance level for a few time, the price bar opened below the resistance and closed above it for 3 consecutive days but there wasn’t enough buying interest in the financials to fuel the continuation move causing the congestion. I think this is largely due to the uncertainty in Europe, fearing the European banks may let down the US banks’ performance. Nevertheless, with the fact that several major banks bounced off their lows in the last 2 months and better than expected earnings reports, I'm quite confident in the US financials therefore I'm still betting the XLF on the upside. But the risk level at main support/resistance @ $13.31 should not be neglected, know your stop and don’t stay in a losing trade until it’s too late.

In the hourly, the XLF broke the bottom of the up sloping channel (green line) during Monday’s pre-market, since then the XLF has been trading from side to side in a downward channel. The XLF was trying to make another high @ $14.34 in the early morning of January 26^th but ended up in a bull trap, shaking some people out of the uptrend trade. Even so, I think this is just a consolidation of the previous up move rather than a reversal, it should resume to the up move if there isn’t any significant bad news comes out in the near future. For Intra-day trade, I add a few more support/resistance levels that should be good for a few days. If you look over to the left hand side, there is a gap that hasn’t filled yet and the XLF bounced off this level for 3 times, so I mark a support level @ $13.62; and this will be last defense line if I'm wrong in the long trade. The support/resistance level @ $14.08 is more like an inference line. Price flipped around this level, it was a support level early in the down channel then became a resistance later on. As the top of the down channel is going to intersect with this level, a move, whether it’s on the upside or downside, should happen sometimes soon, so watch out and don’t get in the wrong side. Higher up is another resistance level @ $14.23. Remember my interim resistance from the daily chart is set at $14.17, but the resistance level @ $14.23 is a bit more precise since price reversed and bull trap happened at this level. If the XLF is able to clear this level, it should head toward the immediate target level @ $14.62. On the other hand, remember where your risk level is. If the XLF continues in a downward channel, the bottom of it should be where your stop located; and if it moves to the upside, either $14.08 or $14.23 are good levels to locate your stop depends on the price and your risk tolerance. In all cases, you should never let it break through the support level @ $13.62, because it should go right down to the gap bottom @ $13.47.          

In the 15minutes chart, I drop a Fibonacci Retracement study and you can see how price reverses between each level. When price is bouncing between levels, any level that price has a resistance on should be the target and any level that price finds support should be the risk level. So far the 50% level @ $13.99 and 61.8% level @ 13.91 provided pretty good support for the last couple trading days. So here you have 2 more options to decide where you want to locate your risk level. What’s more, the 61.8% level, also known as the “Golden Ratio,” is the best level among all Fib levels, if price breaks below it, I don’t recommend you to take a position because the 78.6% level is not as good as 61.8% in terms of support strength.

You may notice that each Fib level is only few pennies apart, you won’t be able to make any real money if you trade less than 5000 share each lot; if you wish to capitalize gain on a larger movement, the first 2 charts will be a better reference. For high frequency trader or scalper like me, I don’t always trade large move. Instead, I try to gain from pennies’ moves with a large share size. In fact, I find this easier than trying to make a 50 cents move because I usually stay in a trade for a few minutes, or even seconds, then I'm out and re-enter again. The shorter time I'm in a trade, the less I'm emotionally affected and the smaller chance I will make a bad decision.  

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.